Over the past few years, cryptocurrencies have shifted from an obscure asset to a genuinely popular investment, so you may not have only heard of them but also wondered whether you should jump on the crypto bandwagon and learn how to buy bitcoin. Well, before you do that, it’s imperative to take the time to consider whether this is a suitable investment for you (because if it works for someone, it doesn’t necessarily mean it will work for you as well). In this blog, we will discuss everything you need to know about cryptocurrencies to help you make an informed decision, so keep reading! 

What are cryptocurrencies?

Cryptocurrencies are virtual currencies that are based on cryptographic systems, enabling secure payments without the involvement of third-party intermediaries. The term “crypto” refers to the different cryptographic techniques and encryption algorithms protecting these entries, including elliptical curve encryption, hashing functions, and public-private keys. 

Central to Bitcoin and other crypto asset’s functionality and appeal is the blockchain, which represents a set of connected blocks of information containing transactions that validators have independently verified on the network. All newly generated blocks require verification before they are confirmed, meaning that transaction histories cannot be forged. Different cryptocurrencies are available on the market, and it’s essential to understand the types because this can help you guide your investment choices and decide which coin is worth putting your money into – for example, a crypto project that has a robust purpose tends to be riskier than one without any use.

Generally, when hearing about crypto types, you hear the name of the coin, but coin types and coin names are two different concepts. Some crypto types it’s essential to know about include utility (for example, ETH and XRP), transactional (Bitcoin is the most popular among these coin types), governance (like Uniswap), platform (such as Solana), and security tokens ( for instance, a stock that has been tokenized, with its value being transferred to the digital ledger, such as MS Token).

A look at the pros and cons of cryptocurrencies 

Cryptocurrencies were developed to revolutionize financial infrastructure, but as with any other revolutionary technology, tradeoffs are involved, so before investing in digital assets, it’s worth exploring their advantages and disadvantages. 

Advantages 

Cryptocurrencies are a decentralized paradigm for money, eliminating the need for intermediaries like monetary institutions and banks to enforce police transactions or trust between parties. Such a system removes the likelihood of a single point of failure ( like a large financial institution that leads to many global crises, such as the one that happened in 2008 due to the failure of major US investment banks). 

The primary purpose of a cryptocurrency is to make transferring funds from one party to another more seamless, without the intervention of a trusted third party, such as a credit card firm or a bank. These decentralized transfers are secured via public and private keys and various forms of incentive systems, like PoS and PoW. Since they don’t rely on third-party intermediaries, crypto transfers between two parties can be quicker than traditional money transfers ( an example to this end is flash loans in DeFi that are executed within a few seconds and typically used in trading). 

A strong advantage of crypto assets that banks don’t have is that they are always accessible for trading. Since transactions are recorded day and night, you don’t have to wait until an exchange starts trading for the day to trade your crypto. The impact of this has been so strong that regular stock exchanges are considering trading stocks outside of usual banking hours, too. So, for investors who are usually on the go, trading crypto can be an excellent opportunity to generate returns outside typical working hours. 

Many cryptocurrencies are available on the market, and although each has unique features, they have some things in common, such as their tendency to see sudden spikes in their value. The prices of crypto assets are driven mainly by the supply from miners and the demand from purchasers, with these supply-demand dynamics resulting in hefty returns. For example, from July 2021 to December 2021, Ethereum experienced an incredible price increase, benefitting investors who got on board at the right time. 

Disadvantages 

While cryptocurrencies can lead to profits, their prices can also crash to lows, which can be frightening (and this can happen quickly). So, if you seek stable returns, crypto may not be the right option. The crypto market relies on speculation, and since it is relatively small, this makes it susceptible to price fluctuations, which could wreak havoc with the coins’ value – a major disadvantage of cryptocurrencies. 

Moreover, while cryptocurrencies may not have the risks associated with central intermediaries, this doesn’t make them completely secure.  As someone who owns crypto, there’s the risk of losing the private key that enables you to access the coins, and if that happens, you could lose all your holdings. And there are also other security threats like hacking and phishing, which newer investors are more likely to fall victim to. 

Another major disadvantage of cryptocurrencies is that their rules and regulations aren’t set in stone, with countries across the globe still implementing them. This leaves a lot of room for uncertainty, which can be challenging for businesses and investors navigating the cryptocurrency landscape, as they face compliance requirements as well as legal risks. 

So, is crypto a good investment? 

The answer is it depends! While crypto can indeed be suitable for individuals who like speculating and are willing to tolerate losing their money, it may not be the best option for those seeking to place savings into their portfolio or earn returns to retire early. So, instead of simply investing in crypto because you’ve heard it’s a good opportunity, consider whether it genuinely fits your personal goals and convictions and assess your risk tolerance. 

Considering the pros discussed above, it’s hard to say that crypto has no value; however, it’s essential to take the time to determine whether the advantages outweigh the disadvantages based on your own circumstances.