The major benefits, risks and what it takes to make an informed decision before jumping in on the crypto game

Some believe cryptocurrency is the future of money whilst others think it’s nonsense, a scam or simply a waste of time and money.

However, we can’t ignore the facts:

• The crypto market has reached a total market capitalisation (i.e. total value of the shares) of almost US$3 trillion
• According to the World Economic Forum, the crypto economy is making history, creating an alternative financial system that is not only global, but available to all, regardless of ethnicity, gender, race, nationality and socioeconomic status
• Since its launch in 2009, three million users have invested in Bitcoin each week, making it the third most used currency globally in market cap, following the Dollar and Euro

Benefits and risks

When blockchain technology was first applied by Satoshi Nakamoto in 2008, Bitcoin was developed. Nakamoto attempted to create a decentralised digital cash system where he solved the double-spending problem with no need for a central server or trusted authority.

Crypto’s supporters believe this is revolutionary because it introduces several benefits including:

• Eliminates many of the risks that come with data being held centrally
• Potentially reduces costs and processing timings by removing bureaucratic layers required by the current middlemen – i.e. banks and other financial institutions, which in fact are researching how blockchain-based systems can replace some of their expensive and inefficient infrastructures
• Offers greater efficiencies thanks to open-source technology, economic rewards, programmable smart contracts and decentralised governance
• Introduces opportunities for inclusion for billions of under- and unbanked people, who could have access to simple to set-up and low-cost automated financial services
• Can enable greater trust and transparency through decentralisation, cryptography, and the creation of new incentives
• Could solve some concerns around FIAT currencies – e.g. when governments increase public debt by printing more money as economic stimulus
• Could reshape supply chains – especially in combination with the Internet of Things and artificial intelligence
• Could offer high gains to traders – but this comes with a big caveat

However, its biggest advantage also presents the biggest risk. With no central authority and clear legislation to govern this market, investors have limited protection when things go wrong.

This novel system:

• Presents technical and systemic risks, which have resulted in significant technical failures and attacks on crypto services
• Could open the door to fraud and illegal activity
• Comes with governance complexities and offers little consumer protection
• Is complex and hard to understand, which currently makes buying difficult for most people
• Is affected by extreme volatility

Consumes a large amount of power, which has an environmental impact. This is especially true for the Bitcoin network.

 

Should you invest in Crypto?

While crypto presents the opportunity of a new financial system and to create a cashless society, as mentioned earlier, crypto can be a risky investment and requires investing in the right crypto for the right amount of time. As with anything that has associated risks, everything in moderation is key.

Firstly, it is advised not to go all in on your self-managed super fund but to instead allocate up to 5 percent towards your growth portfolio. This is of course following extensive research on the type of crypto, assessing whether there is promising growth trajectory for the short to near future.

For those just starting out in cryptocurrency or more risk aversive, you can try meme coins such as Shiba Inu but your chances may still be slim.

For the diligent trader, crypto provides lots of opportunities with the potential to drive better results and a higher return compared to that of traditional forex trading. However, can you match their trading skills and risk appetite?

But here is another point of view to consider, history has not been kind to those who invest in trends, whilst some make a killing, the majority end up losing.

Regardless, when it comes to investing, two things are key: do your research and think of the long-term benefits and risks.

 

By Christopher Zinn, Consumer Campaigner, Life Sherpa