Is Bitcoin A Bubble?
This year, there has been more and more talk about cryptocurrencies, virtual currencies with fluctuating and often exponential values.
It’s been years since the bitcoin phenomenon established itself, with proponents claiming it will revolutionize the economy and money. (Full disclosure: Author invests in bitcoin, ether and dogecoin.)
In light of Elon Musk’s recent statements and the fickleness of some cryptos (such as dogecoin), I wonder: Do cryptocurrencies represent a real market opportunity or a bubble ready to burst?
What Are Cryptocurrencies?
To understand whether cryptocurrencies can represent a real opportunity, or not, it is essential to understand what they are. I advise institutions in the field of cryptocurrency and about blockchain technology, so this is something I have studied in depth. A cryptocurrency is nothing more than a digital currency, created through blockchain technology. It is basically a system of codes that allows transactions to be encrypted, making them more secure and regulated.
Cryptocurrencies do not respond to traditional financial and banking systems, and they are decidedly different from normal currencies. Nevertheless, they are assets you can buy, resell and, in the case of the most popular virtual currencies, even use to perform transactions, like real cash.
The first, and most famous, cryptocurrency is bitcoin, which was launched in 2009. Bitcoin was created by Satoshi Nakamoto, a character shrouded in mystery. Some say Nakamoto is a group of people who, to disguise their identity, used a fake pseudonym.
One of the reasons behind the creation of bitcoin (and subsequent cryptocurrencies) is the possibility of providing an alternative payment method. In addition to bitcoin, there are thousands of other cryptocurrencies, with values ranging from less than a cent to tens of thousands of dollars per single unit.
This has naturally unleashed a host of new investors and speculators, lured by cryptocurrencies’ earnings potential. Those who bought a few bitcoins for a few dollars early on could have ended up with a small fortune.
The Risks Of Crypto
Certainly, like any other investment, there is nothing 100% “safe” about betting on this type of asset. Just as investing in stocks, commodities or startups involves risks, investing in virtual currencies also involves the possibility of losing your capital. Cryptocurrencies are very volatile. The value of a coin can fall by several percentage points within minutes, though it can also rise quickly. Unfortunately, such movements cannot be accurately predicted by analysis.
What is clear, however, is that digital currencies are an increasingly consolidated reality. They are no longer simply a phenomenon of the moment. Proof of this is the fact that more businesses (including physical ones) are starting to give bitcoin a chance, allowing them to perform transactions directly using the currency.
The main risk for these businesses is that bitcoin could experience a decline, and its value would no longer be what it was when it was used for payment. The value of 1/100th of a bitcoin, for example, may not be the same in a few months, and as a result, that money collected for the sale of a product/service may be significantly less than it was at the time of the transaction.
However, the same argument applies in reverse. Consider the story of what is considered the first transaction with bitcoin, by a man who used 10,000 bitcoins to pay for pizza. With those 10,000 bitcoins today, he could have opened a chain of pizza restaurants.
Investing In Crypto
I believe cryptocurrencies represent a real and concrete investment opportunity. However, as with any other asset, an investor must first analyze any potential cryptocurrency investment and weigh its risks, so as to reduce the risk to their portfolio and try to increase profit.
As mentioned, there are thousands of cryptocurrencies, so choosing the one or ones to invest in is a decision that must be studied carefully. Before investing in cryptocurrency, you should familiarize yourself with all the risks. After all, there are dangers and bad actors lurking in the space, who want to rob investors of their money. In addition, you should be aware that investing in cryptocurrencies can result in a total loss of your capital, in the worst-case scenario.
Another big risk factor with digital currencies is the loss of access data. Anyone who loses their private keys can no longer access their values on the blockchain. For this reason, they should be backed up several times. Although investors can also have their investment managed by a service provider, online exchanges can also be hacked. It cannot be ruled out that a platform could also cause one’s assets to disappear, such as investors feared with the recent fall of Turkish exchange Thodex.
In addition, transactions on the blockchain are not revocable. This means that a transfer to another address cannot be reversed. Here, caution is also required when checking the addresses.
That being said, the crypto market presents enormous opportunities for those who are willing to shoulder the risks. There is no doubt to me that digital currencies represent the currency of the future.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.